Climb Global Solutions Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss Climb Global Solutions Financial Results for the Q1 Ended March 31, 2024. Joining us today are Klim's CEO, Mr. Dale Foster the company's CFO, Mr. Drew Clark and the company's Investor Relations Advisor, Mr. Sean Mansouri with Elevate IR.

Operator

By now, everyone should have access to the Q1 20 Klim Global Solutions' website at www.klimglobalsolutions.com. This call will also be available for webcast replay on the company's website. Following management remarks, we will open the call for your questions. I'd now like to turn the call over to Mr. Mansouri for introductory comments.

Speaker 1

Thank you. Before I introduce Dale, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward looking statements under the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward looking statements. These forward looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward looking statements, which are being made only as of the date of this call.

Speaker 1

Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward looking statements. Our presentation also includes certain non GAAP financial measures, including adjusted gross billings, adjusted EBITDA, adjusted net income and EPS and effective margin as supplemental measures of performance of our business. All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts and other important information in the earnings press release and Form 8 ks we furnished to the SEC yesterday. With that, I'll turn the call over to Climb's CEO, Dale Foster.

Speaker 2

Thanks, Sean, and good morning, everyone. We continue to make progress in growing Climb and strengthening our customer and vendor relationships in the Q1 as we produced double digit organic growth in North America and we benefited from a recent acquisition of Data Solutions in Europe. Although we generated solid top line growth, we experienced softer volumes across a key few vendors, primarily related to our timing with the timing with respect to their sales cycles. This included a key vendor from 2023. While this adversely affected our bottom line in Q1, we expect to return to growth with these vendors over the back half of the year.

Speaker 2

As many of you are aware, our acquisition of Data Solutions brought a deep network of relationships to Climb as well as a robust recurring revenue base with more than 90% of its fiscal 2023 revenue coming from existing reseller partners. We've already begun to take advantage of cross selling opportunities between Climb US and Climb EMEA teams. For example, we signed global agreements with Delenia, SolarWinds and SUSA to name a few. Although these synergies are still in the early stages, we expect to uncover additional cross selling opportunities as well as drive further operating efficiencies as we continue to integrate data solutions into our global operations. During the quarter, we deepened current partnerships with both finding new marquee vendors to our line card.

Speaker 2

We evaluated 32 vendors and signed agreements with only 4 of them, demonstrating our commitment to participating and partnering with the most innovative cutting edge technologies in the market. For example, in Q1, we expanded our partnership with JAMF. They are a leading provider of Apple device management and security software that enables businesses to efficiently manage and secure their Apple devices, ensuring seamless integration, enhanced productivity and streamlined workflows. Initially, we partnered with Janska to launch their products in Canada, but based off the strong initial results, we reevaluated the scope to expand distribution in the United States, demonstrating our ability to successfully launch products and offer additional geographic exposure to our network of resellers. As we've often said in the past, we strive to build longstanding meaningful relationships with our partners.

Speaker 2

As a result, we are seeing increased exposure from targeted media coverage and industry interviews with our global teams, in addition to receiving several notable recognitions from key vendor partners. In the Q1, Climb was awarded distributor or partner of the year by numerous vendors including Delenia, Wasabi, Trend Micro, LogiGate to name a few. These awards are an affirmation of our strategic direction and speak to our approach to a limited line card so that we can focus on going deeper with our vendor partners and truly add value to their sales efforts. We are excited to build upon the strong growth we've achieved together. Looking to the remainder of 2024, we have a solid foundation to place in place to continue driving organic growth with existing vendors while signing new market leading technologies to our line card.

Speaker 2

We expect to uncover additional synergies and cross selling opportunities as we further integrate data solutions onto our operating platforms. Our ERP implementation is also on track to go live this summer. This will enable us to drive further operating efficiencies through our global operations. We will continue to leverage our strong liquidity position to explore new acquisitions that will enhance our offerings and expand our presence in both domestic and international markets. We believe the combination of these initiatives will lead to yet another year of record growth and profitability.

Speaker 2

With that, I will turn the call over to our CFO, Drew Clark. He will take you through the financial results. Thank you. Drew?

Speaker 3

Thank you, Dale. Good morning, everyone. Quick reminder, as we review the financial results for our Q1, all comparisons in the variance commentary refer to the prior year quarter unless otherwise specified. Before we jump into the results, let me reiterate Dale's comments about our positive outlook for the balance of 2024 and beyond despite the low expectation operating results for the Q1. As reported in our earnings press release, adjusted gross billings or AGB, which is a non GAAP measure, increased to 16%, which is $355,300,000 for the quarter compared to $306,700,000 in the year ago quarter.

Speaker 3

Net sales in the Q1 of 2024 increased 9% to $92,400,000 compared to 85,000,000 dollars which primarily reflects organic growth from new and existing vendors as well as the contribution for our acquisition of Data Solutions in October of last year. Again, as we have previously stated, we focus on AGB as the true metric of our top line growth as the calculation of net sales is influenced by product mix and the respective adjustment to convert AGB to net sales for financial reporting purposes under GAAP. In the Q1, we had an increase in the sale of security, maintenance and cloud products, which are recorded net of related cost sales and therefore leads to a larger adjustment from AGB to net sales. Data Solutions also has a higher adjustment of AGB to net sales and their net sales were 33 31% for the quarter compared to our consolidated 26%. Gross profit in the Q1 increased 12% to $17,000,000 compared to $15,200,000 Again, the increase was primarily driven by organic growth from new and existing vendors in both North America and Europe as well as contributions from data solutions.

Speaker 3

Gross profit as a percentage of adjusted gross billings was 4.8 percent compared to 5.0 percent, driven by a decline in our solutions business GP and related margin percentage and early pay in North America. SG and A expenses in the Q1 were $12,500,000 compared to $10,200,000 for the same period in 2023. SG and A was in line with our internal budget and sequentially from the Q4. SG and A as a percentage of adjusted gross billings was 3.5% compared to 3.3% in the year ago period. The increase was primarily driven by expenses from Data Solutions, which we expect to reduce as we further integrate their business into our financial operating systems and their sales rebound in the second half of the year.

Speaker 3

Net income in the Q1 of 2024 was $2,700,000 or $0.60 per diluted share compared to 3,300,000 dollars or $0.74 per diluted share for the comparable period in 2023. As mentioned in our earnings press release, earnings per diluted share in the Q1 of 2024 was negatively impacted by $0.01 in FX and $0.04 in acquisition fees, a portion of which related to carryover of the Data Solutions transaction as well as prospective opportunities. Adjusted EBITDA in the Q1 was 5 point $5,000,000 compared to $5,700,000 The decrease was primarily driven by increased SG and A expenses related to data solutions and lower gross profit generated in the quarter relative to expectations that we expect to return in the back half of the year. Adjusted EBITDA as a percentage of gross profit or effective margin was 32.5% compared to 37.4% in the year ago period. Clearly an unacceptable achievement, we were confident to return to target levels in the future quarters.

Speaker 3

Turning to our balance sheet. Cash and cash equivalents were $43,600,000 as of March 31, 2024 compared to $36,300,000 at December 31, 2023, while working capital remained flat during this period. The increase in cash was primarily attributed to the timing of receivable collections and vendor payments. As of March 31, 2024, we had $1,200,000 of outstanding debt with no borrowings outstanding under our $50,000,000 revolving credit facility. On April 29, consistent with prior quarters, our Board of Directors declared a quarterly dividend of $0.17 per share of our common stock to shareholders of record as of May 13, 2024 and payable on the 17th May, 2024.

Speaker 3

To echo Dale's earlier comments, our strong balance sheet provides us with great flexibility to evaluate M and A opportunities both domestically and abroad, enhance our service and solution offerings across existing and future geographies. We will continue to maintain a limited and very focused line card to ensure we are partnering with the most innovative vendors in the market, while also taking advantage of some scale opportunities. Our ERP implementation coupled with the further integration of data solutions and our U. K. Operations will enable us to drive operating efficiencies throughout our global footprint.

Speaker 3

We believe these initiatives will enable us to grow adjusted EBITDA at a rate that exceeds our increase in adjusted gross billings. So we will keep on climbing. This concludes our prepared remarks. We'll now open it up for questions from those participating in the call. Operator, back to you.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Vincent Colicchio from Barrington Research. Please proceed.

Speaker 4

Yes, Dale. So to be clear, was the light volume with certain key vendors, was that a timing issue or was it a lengthening of their sales cycles?

Speaker 2

Yes. A couple of things, Vince, and that is, if you look at the quarter, we have vendors that finish up their fiscal years in different sections. We have some of the bigger ones that actually ended the March. Sometimes they leak over. And it's funny, we have 2 or 3 of them that are going through different ERP implementations as well, so they get kind of stuck up in that.

Speaker 2

But we had some vendor stuff that pulled into Q4, some that are pushing into Q2. So if we look at it and then we had a large deal with our Spinnaker acquisition a year ago that didn't reoccur in Q1. So just if you look at the puts and takes on it, it was just back and forth, but nothing underlying. And we were talking about as a team, of our top 20 vendors, 16 of them grew in Q1, of our top 20 customers, 17 of them grew in Q1. So the underlying piece is still very strong, it's just the timing of quite a few of them.

Speaker 4

So the where you saw the volume softness, do you expect for the year to be on budget with those clients?

Speaker 2

We do. As Drew mentioned in his comments, I mean, we think we're in a strong back half of the year. Some of it's already coming into our Q2 stuff that we didn't see in Q1. And we don't just to be open, we don't push to bring things into a certain queue to make an exact number. Our vendors do and we do favors for them as far as, hey, when they need to do as far as timing goes.

Speaker 2

So the numbers are what they are and some of them drift into the next Q, some of them get pulled forward on that side.

Speaker 4

Okay. And then the outside of the aforementioned vendors where there was volume, Within your top 20, are you growing in line with the rest of the business better? What does that look like?

Speaker 2

Yes, we I mean, of course, the newer vendor and depending on their life cycle, they're growing at a faster rate. That's when we talk about, hey, we want to really try to get double digit growth because that's where the emerging vendors are. As the vendor becomes more mature, their growth slows down. It's just almost every industry. So we have some larger vendors that they're in the single digit growth and we make it up make up for it with the emerging ones.

Speaker 2

So that combination is what we talked about as management team to focus and get to that over 10% rate. But if you looked at the numbers, our top line grew overall, so we had the revenues and it just depends on the vendor mix and then the margin profile per vendor. So there's a lot of little moving parts, but that's how we deal with quarter by quarter.

Speaker 4

And has there been any change in areas of segment strength, technology and data center, those continue to be the key drivers?

Speaker 2

Yes. Our 2 main ones are pillars, So it's So it's the first time we've had a real big vendor move to the U. S. And started with Spinnaker in the U. K.

Speaker 2

Or our Glimey Gay teams. So we'll see that pick up in the second half of the year. We're just getting going. We're just getting our first orders with that, but that's in the data center space. And then we'll build, just like we do in security, when you have somebody like Sophos in the monitoring space, SolarWinds, we'll build a cottage industry vendors around them that support them that are cross sellable.

Speaker 4

Okay. I'll go back in the queue. Thank you.

Speaker 2

Thanks, Vince.

Operator

Our next question comes from Howard Root from Climb Global Solutions. Please proceed.

Speaker 5

Not from Climb Global Solutions, individual investor, but thanks for taking my question. Two small ones and then a more general one for Dale. First, the adjusted gross billings, I think, went up $48,000,000 Q1 versus Q1 a year ago, 16%. Can you give us a breakdown of how much of that is organic and versus how much of that is from data solutions or any other acquisitions?

Speaker 2

Yes. I'll let Drew jump in. I mean, he's got the exact numbers, but it's I think it's well, I'll sort it out there, it's probably split fifty-fifty or it's close to that.

Speaker 3

Yes, that's correct Howard. A little more data solutions generated approximately $29,000,000 in the quarter for us. Again, as Dale mentioned in his response to Vince, that was lower than our expectation ahead of their prior year quarter, about flat really with 2023. But one of our their large vendors had some significant pull through in Q4, which obviously gave us a very strong Q4 result and exceeded our expectations. But unfortunately that detracted from Q1.

Speaker 3

But Data Solutions is performing on par, so we're excited about that. And their contribution was very meaningful in Q4 and not as impactful in Q1.

Speaker 5

Okay. So and then why do you say second half rebound rather than a Q2 rebound? And I assume that applies to the Data Solutions key vendor mainly.

Speaker 3

Yes. Data solutions tend their 2 quarter is 2nd quarter is their weakest quarter historically. And as you know, if you look at our historical trends, Q2 tends to be one of our lower quarters as well in terms of both top line as well as gross profit. So Q2 will be solid, but we'll see a bigger rebound with some of those vendors, especially the data solutions portfolio and then the Spinnaker vendors that we acquired in Q3 and Q4. Dale, do you have other thoughts?

Speaker 2

No. Yes, we're on track with the data solutions team. And just to add to that, Howard, we integrated the sales teams early January for data solutions and some of their managers are running now our Climb U. K. Team.

Speaker 2

So that team is pretty integrated. That's step 1. The next part of the integration is upcoming. It'll be in line with our ERP that's going to roll out in July, August timeframe. And we believe by the end of this year, we'll have every company we have a lot of modern systems right now, but everything we've acquired in the last 2 years will all be under 1.

Speaker 2

And Drew is running the project, but the focus is by the end of Q3, so that we have a true Q4 on 1 ERP for reporting. And you can imagine from 3 different disparate systems trying to pull those all together. It's not like we're special, every company goes through it, but we want to get through it in Q3.

Speaker 5

Yes. Well, good luck with that one. We all know how hard that is to pull off, but it has to be done. Second question, kind of I've always modeled it kind of keeping it simple like 5% gross profit, 5% of adjusted gross billings, then SG and A below 3%, so net income is above 2%. And this quarter, I think, somewhat because of the acquisition and cost there, you're at 4.8% on gross profit, 3.5% on SG and A, so net income is down at 0.8%.

Speaker 5

Are those realistic targets for the business, the 5.32% or how do you look at that or am I off on my assessment of where the number should be?

Speaker 2

Yes, I think your first modeling is more accurate. Like we said, we had a little softer in Q1 on some of the margin profile of some of our bigger vendors, but I don't we don't see that. We don't see the trend. And we know as these vendors get bigger, it's the larger the vendor, there's 2 parts that happen. They expect there's less work to be done in the channel, so they try to reduce the margin profile, not only to us, but also our reseller partners.

Speaker 2

But on the other flip side of that, as a distributor and reseller partner, as they grow and it gets wider of their business, we're more efficient in actually transacting it. So we save the dollars on that. So it kind of goes for 1 for 1, but that's a pretty good way to look at it. And if you look over the last couple of years, we have enough emerging vendors coming in that have a higher margin profile and that's to make up for these larger ones. And we I can just tell you, it's non stop.

Speaker 2

We talked about evaluating 42. There's probably another 10 or 15 that we talked to that we are just don't even get off to the next phase because they're just not ready even to have a channel talk yet. So if it wasn't for that robust vendors just coming out of the startup phase, I would say, okay, it's going to slow down a little bit. We don't see that at all.

Speaker 5

Okay, great. And then just more general, and I always like to do this kind of pulling it up to 30,000 feet. Dale, how do you see the sales environment and trajectory, in particular, the economy and interest rates? Does any of the macro effects going on worldwide affect you and your business in any way? And how would you see that going forward the next year, 18 months?

Speaker 2

Yes, I am not that smart, Howard. So on the macro side, we look at it and we're like, it has to have some kind of impact on us. But here's what I would say is we are so small in our market space with our peers, right? If you take a look at the big three distributors, they're all $40,000,000,000 plus. They do a lot more hardware than we do.

Speaker 2

We are software, software. So we compete with divisions inside of each of those big guys. What we're seeing though is the larger they get in some of their vendors, because if you look at their top 10 vendors are bringing in 90% of their revenues. As soon as you get down the line card, those vendors are not getting the care and targeted approach that we provide. So we're seeing share shift from our competitors to us in a pretty big way.

Speaker 2

If I look at just the ones that we talked about that we won awards for, if you take a look at those vendors, the share shift that they're pushing to us because they're just getting a much higher touch white glove service to sell their products out to the market. So on the positive side, our teams are really taking advantage of that, but we don't see the effect because we're looking at a much smaller target audience. We're not selling to 30,000 resellers, we're selling to 7,000 globally where our competitors are doing that. So it's we just don't see it as much. And we think we can we have a lot of levers we can pull.

Speaker 2

We have a great balance sheet. So we will just go and say, hey, this is where we're going to target now. We can move very quickly and put a sales team like we have on a specific vendor and capture a bunch of their business and then do the same thing. So it's much more of a tactical approach there.

Speaker 5

Okay, great. So good news is the economy doesn't really affect you. The bad news is it's all on you. So success and failure is on your execution.

Speaker 2

That's right. That's the good news. It's all on us. I mean, we can make the choices. So, yeah, we'll take all the blame of that as well.

Speaker 2

But we feel that, we have enough feelers out there where we can actually know a little better than putting your finger in the wind and saying, hey, we're going to go after this market or the vendors are approaching us and saying, hey, can you guys help us in this situation because we've had budget cuts and we can actually fund you through the channel via margin. And we're like, yeah, we'll double down on that. We've built a team with Delenia and they've just been a great partner for us and you'll see those numbers continue to grow with Delenia.

Speaker 5

Okay, great. Well, congrats on the quarter, the 16% revenue growth great overall year over year and challenges come up, but you guys are addressing it. Thanks again.

Speaker 2

Thanks, Edward.

Operator

Our next question comes from Bill Dezellem from Tieton Capital. Please proceed.

Speaker 6

Thank you. A couple of questions. First of all, allow me to circle back to your February 20th press release referencing Global Technologies. That release seemed a little bit different than your typical release. Would you please talk about that relationship and what it means or does not mean?

Speaker 2

Yes. Thanks, Bill. So Global Technologies, they're diverse supply and we're getting asked more and more from our customer base and some of our vendors that we will have a partnership or a division that does for a diverse and secure supply chain. So we've done this. We've known the founders of Global Technology.

Speaker 2

They're actually also our vendors. So it's early stages, but it's, we have big customers that need that. We're looking at a government side of that as well, if you're familiar with the 8 program. So my background is the Fed space, so it's the government contracts are key to that. So nothing that they can report right now that, hey, we've had all these big wins, but it's definitely another component of Climb that we need to have as a diverse supplier.

Speaker 2

And that's why we built we put that relationship together.

Speaker 6

And so you broke up in part of that answer, but essentially this isn't a joint venture. It's not an acquisition, but you're working together in specifically for the federal space. Is that the essence?

Speaker 2

No, the federal piece will come. Right now, it's really in our larger partners as we have a diverse supply chain. But yes, it's early on those. But yes, I'm saying we're going to take advantage of the federal side of that as well, but it still can be state and local. It's with our customer base and our vendors that are looking for a diversity partner.

Speaker 6

Great. Thank you. And then relative to your line card, I know in this type of a business, you've experienced

Speaker 3

it before

Speaker 6

and as have other firms, you just end up with a vendor or a few vendors that take off in the marketplace and you end up being a big beneficiary of their success. So the question is, how many vendors on your line card today do you see that you think could explode in a good way, revenues just jumping in the next year or 2?

Speaker 2

Yes. If I opened it up to my management team, we would argue over those top 5 or 6. And here's what we do. Just like when we pick a vendor, we bet on the jockeys that are running that vendor, what their go to market is for the channel, the same thing as far as them expanding because we've seen what they've done in the past. But then there's a lot of outside factors.

Speaker 2

If you look at the majority of our vendors are not probably cash flow positive, right? They're out of the startup phase. They're still kicking in dollars to grow out their channel teams. So it depends on where we get them in their life cycle. I would say right now, if it was Dale Foster, I'm going to put my money on 3 vendors, I would pick 3 of our vendors.

Speaker 2

It would take off on that side, and one of my sales leaders would pick 3 other ones probably. So we do have a pretty good robust pipeline where we think, hey, we're going to see some real expansion. The quickest these bigger behemoth distributors just move in a little different direction or it gets messy. All the advantages come to us where they need somebody that's much more of a targeted team.

Speaker 6

Great. Thank you. Appreciate the help.

Speaker 2

Thanks, Bill.

Operator

Our next question comes from Vincent Colicco from Barrington Research. Please proceed.

Speaker 4

Yes. One more for me. The share gain you're seeing with certain software vendors from distributors, large distributors, are they largely quite small emerging companies or are they some of them decent size?

Speaker 2

I guess it depends on what you mean by that Vince, I mean decent size. We look at a vendor, if they can get to $100,000,000 that would be a mid to large vendor for us. If you look at Sophos $800,000,000 SolarWinds $400,000,000 $500,000,000 so sizable vendors on that side. But that's what I would consider is some of the larger ones. And we're seeing more of those.

Speaker 2

And here's what happens in our market typically, and that is as these customers or I'm sorry, vendors get larger, they look for more efficient ways to get to the market. And then the key word is how do they scale it, right? How do they scale their business? We're talking to one right now that says, hey, we need to scale and we can't do it by adding another 80 sales reps. The channel already exists.

Speaker 2

So you have these thousands of resellers, you've got a handful of distributors. If we use the channel and leverage the channel, we can scale and we don't have to keep dumping the dollars into it. So we're just getting a one for 1. We actually are getting a 3x on the investment we put into the channel. So that's where we want to be.

Speaker 2

That's where the inflection point is for these vendors. And we try to get early on with them, have a deeper relationship with them. So when they go that way, we're ready to go. And some of them, there were just still prospects for us that we haven't even signed yet, but we see where they're going and we're seeing, hey, we're a good fit for you guys. If you look at the gap between where we sit as a adjusted gross billing distributor of $1,000,000,000 and the next one at $20,000,000,000 It's a big gap for us to grow in there without really being seen as that much of a competitor to the larger teams.

Speaker 4

Thank you for responding.

Speaker 2

Yes. Thanks, Vince.

Operator

This concludes our question and answer session. I would like to turn the floor back over to Dale Foster for closing comments.

Speaker 2

Thank you, operator. I'd like to say thank you to all the stakeholders that we continue to work with and help us build an exceptional company and really focus on the channel. We have a great team and we're going to continue to execute our strategic plan for the benefit of all our shareholders. With that, I appreciate everybody joining us today.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Climb Global Solutions Q1 2024
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